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SECTION 1- THE
FOUNDATION OF
ECONOMICS
Study Notes
Taken from the Cambridge IB Economics textbook
Ch
...
1 –
1
...
Needs –
Food – goods (physical)
Water – goods (physical)
Insurance – services (non-physical)
Education – services (non-physical)
Wants –
Cars – goods (physical)
Television – goods (physical)
Entertainment – services (non-physical)
2
...
Due to the
nature of scarcity, choices must be made in order to distribute these resources as people
cannot have everything they want
...
3
...
Since there is a limited amount of resources, it is vital that everything be utilised to its full
potential, so as to not waste any resources
...
4
...
Due to an abundance of need for water, more water is produced as it will be fully utilised
and there will be little to not waste, thus making it a cheaper and more available resource
...
2
Ch
...
2 –
1
...
What to produce?
2
...
For whom to produce?
2
...
The first two question are in regards to resource allocation, and the third question is about
the distribution of output and income
...
They are connected as the distribution of output/income only occurs if resources have been
allocated
...
Consider the following, and identify each one as referring to output/income
distribution or redistribution; or to resource allocation, reallocation, over allocation or
under allocation (note that there may be more than one answer)
...
Income redistribution and over allocation/under allocation
...
Resource over allocation
(c) Whereas rich countries typically spend 8–12% of their income on providing health
care services to their populations, many poor countries spend as little as 2–3% of
income
...
Income distribution, and resource over allocation
(e) If countries around the world spent less on defence, they would be in a position to
expand provision of social services, including health care and education
...
Output distribution
3
Ch
...
3
1
...
(b) What are the factors of production?
computers that aren’t produced if the economy were to move from point C to B
...
In production, cost does not always equate to money
...
These two
statements have the same meaning as they both convey the message that productive
efficiency means producing while creating the lowest possible opportunity cost, just in
different wording
...
(a) Distinguish between output actually produced and output on the PPC
...
While this works in theory, it is not an accurate portrayal of how
decisions will play out in the real world, so it is not realistic to produce any product on the
PPC
...
Almost certainly, countries will have thousands, if not
millions, of products to consider, so focusing on only two and maximising only those is
unrealistic, as the economy must factor in resources needed for the countless other products
is creates
...
Say an economy is initially at point F, producing 15 microwave ovens and 12
computers (Figure 1
...
What would be the opportunity cost of moving to a point on
the production possibilities curve, such as point C, where it would be producing 26
microwave ovens and 25 computers?
The opportunity cost of choosing to change the production amount would be the money that
is used in creating more of both of those products, which now can’t be used on other
products
...
1
...
Explain the social scientific method
...
g
...
Make observations of the world and select an economic question
2
...
Make a hypothesis about how the variables are related
4
...
Test hypothesis
6
...
Why is it important to compare the predictions of a hypothesis with real-world
outcomes?
It is vital that predictions be compared to real world outcomes as it is impossible for every
single prediction to be accurate, and thus they should be compared to see where the
assumption went wrong, if it did
...
3
...
They are helpful as they allow
economists to isolate important aspects in the real world and show connections between
variables
...
These models make it easier for economists to answer that ‘why’
question
...
1
...
Consider the statement, ‘If you increase your consumption of calories, you will put
on weight
...
This statement does not account for the fact that while they may increase their consumption
of calories, they may be exercising more as well, meaning their weight will stay constant or
may even decrease
...
Rewritten (1): If you in